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Tech Profits: Looking Beyond the FANG Stocks

FANG stocks have dominated financial headlines and rewarded shareholders for several years now.

Most people have heard of the "FANG" stocks. The term was popularized by a TV personality when asked about his top picks for investors.

The "F" stands for Facebook, at least that much is certain. But the other letters are somewhat interchangeable.

In the original version of FANG, "A" stood for Amazon, but more often I am hearing about how Apple could also be an "A" stock. Then there is the "N", which stands for Netflix, but more recently NVIDIA has been a fan favorite.

Finally that "G" stock is commonly referred to as Google, but following the inception of FANG, Google changed its name to Alphabet, making that "A" a crowded spot!

Overwhelming Popularity

The overwhelming popularity of FANG has left many solid tech stocks in the dust. So many good tech names just don't get the attention they deserve.

This is represented by the volume of shares traded in the FANG names and the volume of non-FANG names. There is a whole universe of stocks that do not fit in the narrow FANG category.

Supplier Plays

A good way to think about all the other tech names out there is to choose just one of the big names and then look at their suppliers. The logic is easy to follow: if the biggest player is doing well, then the smaller suppliers are direct beneficiaries.

Because the suppliers are much smaller than the bigger companies they serve, they can see outsized moves. Think of it this way, it takes a lot to move a $100B company by twenty percent. The smaller supplier, however, is likely only a fraction of that size and could easily double or triple on that move.

There are plenty of suppliers to the FANG stocks. Picking the right ones is the challenge. A good rule of thumb is to look for the suppliers that have the strongest margins. Those suppliers tend to have the best bargaining position when it comes to working with the big boys.

A good example is Ultra Clean Holdings Inc. Massive tech companies need microprocessors to power their servers and devices. Ultra Clean helps design, test and clean the chips before they are sent off to customers. UTCC has soared +298.5% YTD on strong demand for these services.

With FANG being on everyone's radar, a good way to add some diversification into your tech portfolio is to buy stocks that have little or nothing to do with FANG. This means you need to get off the beaten path and really look for something different.

Oftentimes, under-the-radar names are really only under the radar for a quarter or two. After reporting earnings beats, stocks have a way of gaining a lot of visibility. It is important to remain diligent about looking for something most people are not.

I like to look for a good earnings history from the smaller names. This tells me that management can effectively communicate their strategy to Wall Street and then only give them positive surprises. Negative surprises can send shares lower by 20% or more.

What We Really Want

Having a good earnings history is only the start of our stock selection process. For the best results we leverage the Zacks Rank to find stocks that have seen recent earnings estimate revisions. This will get us off on the right path immediately.

Tech stocks that are best of breed often carry the best margins as well. I like to invest in tech stocks that have a strong margin profile. At the same time, I need to see margin improvement over the last few years as well. These companies have to continuously improve their position in the marketplace.

Finally, I like stocks that beat and raise. It is like 6 months of goods news all in one day. The last three months were better than expected (as witnessed by the earnings beat). The next three months are going to be better than expected (as witnessed by the raise in guidance). Combine those two factors and you have a great chance for a post earnings drift higher.

Extreme Networks is a recent example of this kind of scenario. In August, the company beat earnings estimates and management raised guidance for the next quarter. EXTR picked up a quick +32% on the news. The stock is up +164% for the year.

Finding Non-FANG Stocks With Teeth

If you'd like to target promising stocks like the ones we've talked about today, from supplier companies to under-the-radar stocks and more, I invite you to join me inside Zacks' newest investment portfolio, Technology Innovators.

We'll be looking beyond the FANGs to find a small number of cutting edge tech companies that are creating the world of tomorrow. Our aim is long-term triple-digit gains.

I'm ready to pull the trigger on 7 stocks, some of which you may have never heard of before. You can be among the first to see these picks when they're released early this coming week.

Please note: We must limit the number of investors who receive these recommendations. Access closes Sunday, October 15 at midnight.

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